How Reliance’s dollar debt could cost them the bargain

When it comes to raising capital, Indian companies often explore foreign markets, particularly for dollar-denominated bonds. While this can be a lucrative option, a hidden dragon is lurking in the shadows: currency fluctuations. Let’s dive into the case of Reliance Industries, their recent $4 billion bond issue, and the potential pitfalls of foreign borrowing.

Reliance’s Dollar Dash

In January 2022, Reliance, India’s largest company, raised eyebrows with a mammoth $4 billion bond issuance. The deal hailed as the largest by an Indian entity, offered attractive interest rates and diversified maturities. But the devil, as always, lies in the details.

Bond Details (2022)

The multi-tranche offering aggregating US$4 billion comprises of:

• USD 1,500,000,000 2.875% Senior Unsecured Notes due 2032
• USD 1,750,000,000 3.625% Senior Unsecured Notes due 2052
• USD 750,000,000 3.750% Senior Unsecured Notes due 2062

The Notes have been priced at 120 basis points, 160 basis points and 170 basis points over the respective US Treasuries benchmark.

The Fine Print

The bonds were issued at an exchange rate of Rs 74 per dollar. Fast forward to February 2024, and the rupee has depreciated by a significant 10%, now hovering around Rs 83 per dollar. This seemingly small shift translates to a big headache for Reliance.

In Rs crores

Source: aceanalyser

As of the end of December, the net debt-to-EBITDA ratio stood at 0.67 times, slightly higher than the 0.66 times reported a quarter ago. In the latest Q3 update, Reliance reported an 11% year-on-year increase in consolidated finance costs, totalling Rs 5,789 crore at the consolidated level.

Decoding the Domino Effect:

1. Rising Repayment Costs: Every dollar repayment becomes 10% more expensive due to the weaker rupee. This translates to higher finance costs, impacting profitability.
2. Currency Hedging: A Double-Edged Sword: Hedging against currency fluctuations can offer some protection, but it comes at its own cost. Companies need to pay premiums for hedging, further impacting their bottom line.
3. Investor Confidence: Unforeseen currency fluctuations can erode investor confidence in the company’s ability to manage its finances, potentially impacting future fundraising efforts.

A Drop in the Ocean, a Ripple for Others

While the impact on Reliance might be manageable given its size, it serves as a cautionary tale for smaller companies. For them, even a slight currency fluctuation can significantly impact their financial stability.

Lessons for All

The Reliance example highlights the importance of carefully considering currency risks when raising capital in foreign markets. Here are some key takeaways:

• Thorough Risk Assessment: Companies need to conduct a comprehensive risk assessment, including potential currency fluctuations, before venturing into foreign borrowing.
• Hedging Strategies: Explore different hedging strategies to mitigate currency risks, understanding the associated costs and potential benefits.
• Diversification: Diversify funding sources to minimize dependence on any single currency or market.
• Transparency: Communicate currency risks clearly to investors and stakeholders to maintain trust and confidence.

Conclusion

Foreign borrowing can be a strategic tool, but it’s not without its challenges. By understanding the potential pitfalls, like currency fluctuations, companies can make informed decisions and navigate the global financial landscape more effectively.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.